With so much venture funding going into web-based, ad-driven casual games (both the companies that create them and those that monetize them), you’d think the gaming industry as a whole was moving in that direction. I certainly did, at least until today. But Yahoo Games just told me that starting this week, they’re going to host free, downloadable casual games embedded with video ads. (Think games that play more like TV shows, with commercials in between breaks.) Fifty of them are available now; by end of the year, according to division head Kyle Laughlin, they plan to have 400 of these ad-wrapped games online.

This is no small play, and has the potential to reshape the game industry. Just look at the numbers:

Yahoo’s game sub-domain averages 18 million unique monthly visitors from the U.S. alone, according to Laughlin, and 49 million worldwide. This audience is already downloading tens of millions of games from their download page, but they’ve largely been poorly monetized, 60-minute trials that require you to pay to play further (something few do).

With this new distribution system, Yahoo and its partners can target ads according to game player demographics: action games for young dudes, puzzle titles for older players, and so on. Each game is an average of 100 megs, which means downloading will take just few a minutes using decent broadband, but you end up with a more robust, engaging game experience than a (much) smaller, Flash-based web game. (Laughlin claims play time for their casual web games is around 15-20 minutes, but 160+ minutes for their downloadables.)

The advertising itself will be delivered by NeoEdge, which we wrote about last November, and Double Fusion, which we wrote about in 2006. Originally intended to deliver ads for hardcore gamers, Double Fusion has been shifting its focus over the last year, concentrating instead on casual games, which have more players and broader demographics than the 18-34 guy cohort that makes up most of the hardcore base. As CEO Jonathan Epstein put it to me in a joint conference call with Yahoo and NeoEdge, “The nature of the game market is changed.” With this move, I’d say it’s about to change even more.

Imaged credit: games.yahoo.com